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Wednesday, November 12, 2014

Your Path to Financial Prosperity – One Step at a Time…

Have you ever
wondered, no matter how much money you make, the yearly pay raise, the
promotion etc, somehow you always end up with a deficit budget most of the
time. Saving money and accumulating wealth can be a challenge no matter how
much money is coming home in your paycheck.

The purpose of this
article is to help you get your financial habits in order and move towards
financial prosperity – One step at a time..

Lets get started,
shall we?

Step 1: Know Where
Your Money Is Going

It was early 2013, I
had recently gotten married and had to get my finances in order because now I
have a wife and soon I will have a family of my own. At the end of each month,
invariably my bank account was almost empty and I was always left wondering –
what the hell is going on. So, as a first step, I decided to track where my
money was going.

I picked up an old
diary and started noting down the expenses on a daily basis for a month. At the
end of the month I had a clear idea of exactly how much I was spending each
month and on what. Even the brightest of minds cannot remember every little
aspect of our spending habits and it doesn’t hurt to note them down. Use a
notepad and pen or use an excel in your laptop or if you have a smartphone, use
one of those expense tracking apps.

At the end of the
month – review your spendings and identify the areas where you feel you can
cut-down.

Every
year when we get a pay raise, our spending patters change. The moment our mind
senses that we will have more money to burn, we will end up burning all of it
and maybe more. So, Unless you identify this unwanted spending category, you
will continue to be in deficit up until the point when you either start tracking
your expenses or you hit the lottery

Step 2: Know How Much Yow Owe

Kudos on starting on your one step at a time program towards
financial prosperity. If you started out with step 1, you will realize exactly
where your money is going at the end of the month. If you are someone who goes
by the mantra “Cash is King” and does not have any Loans, then you can actually
skip this step as well as the next.

If you are like the majority of the population, you will
invariably have some loan or the other. Car loan, bike loan, home loan,
personal loan, education loan, credit card outstanding etc and etc… The more
categories under which you have loans, the more difficult it is to get out of
the situation and move towards a loan free or debt free life. Anyways – it is
not impossible. All you need is a little discipline and a plan…

Before we work on the plan, sit down, call up your
respective loan providing banks and list down the total outstanding amount
against each of the loans. Total it up and you are all set for Step 3…

Step 3: Plan for a Debt-Free Future

Being Debt Free is not just a dream – it can be reality. All
we got to do is plan. Go back to step 1 where you identified all the categories
of spendings where you feel, you could cut-down on. Start right away. By
cutting back on unwanted spending, at the end of the month you will have an
amount with you that would remain.

Plan A – If you have a lot of Loans:

Put it in a bank account and forget about it. Repeat the
exercise each month. Cut-down on unwanted spendings and accumulate as much
money as you can, in this account. If you get a pay raise, forget the fact that
you have more money to spent. Divert the additional income to this account. By
the end of the year, you will definitely have a sizeable amount which you can
use to repay all or part of at least one of the loans. Repeat this exercise
every month/year and you will be debt free in the next 3-5 years.

Yes, I understand 3-5 years may sound like a long time but
think of it this way, if you don’t plan like this, you will most likely take 8
or 10 years to repay the loans. Which one sounds better?

Plan B – If you have lot of Credit Card – Outstanding Debt:

Credit Card debt is like forest fire. Even though the bank
only insists that you make the minimum repayment due amount, they will be
charging you hefty interests on the whole outstanding amount from the date you
swiped to your card up until the date you fully repay it. So, whatever surplus
you end up with at the end of the month, use that to repay the credit card
outstanding debt ASAP…

Step 4: Build an Emergency Corpus

Gone are the days when both employee and employer were loyal
to one another. These days, companies aren’t as loyal to its employees as it
used to be. Even at the slightest forecast of lower sales or lower profit,
heads start rolling. This is very common in almost all private sector companies
across the globe and industries. So, we should be safe. Isnt it?

Start the month with 10% of your salary diverted towards
this emergency corpus. If you cannot start with 10% right away, start small –
3% or 5% and then implement step 1, identify unwanted expenses and increase
this emergency corpus to 10% every month. Only spend what remains after this
10% contribution.

It might sound like a lot, but trust me, this emergency
corpus will go a long way to help us in the unfortunate event of we losing our
job. Or maybe one of our loved family members is sick and we need money for
medical expenses, this emergency corpus will come in really handy…

Step 5: Invest your savings – Don’t let it stay idle

Money that is left idle in your savings account is probably
the biggest financial crimes we can commit. If you followed Step 1 – you
could’ve identified the amount or surplus you can save each month (by cutting
down expenses + identifying how much money will remain at the end of the
month). If you follow step 4 – you will keep a % of your income each month as
emergency corpus. So, a smart guy/girl would invest this money – rather than
let it stay idle in their account.

Plan A – For the Emergency Corpus: Start out a Recurring
Deposit for the amount you wish to set aside. Select duration as 1 year and at
the end of 12 months, restart a fresh RD and deposit the maturity proceeds as a
Fixed Deposit.

Plan B – For the Monthly Savings: Start out a Mutual Fund
SIP for the amount you can afford to save each month. If you want you can
choose a full equity fund or something that is balanced between equity and
debt. The fund you choose is your choice but remember to select a fund that has
equity exposure. Otherwise there wouldn’t be a difference between this and the
RD.

Step 6: Plan for a Second Income

Though this is something that wouldn’t be feasible for
everyone – right off the start, with a little planning and effort this is quite
possible.

Fixed Deposits have monthly or quarterly interest payout
options. After a few years’ worth of accumulating the emergency corpus, this
corpus can actually make a small but regular income for you. If you have
surplus, you can buy an extra house/shop and rent it out to make an extra
income. You can also try freelancing like tuition classes to supplement your
income.

Don’t start out with hopes of earning thousands each month.
Such plans will most likely start off small but as time goes by, there is only
one way to go à
UP…

A Word of Caution:

Following these 6 steps does not guarantee that you will be
a millionaire soon. But, it can guarantee that your finances will get sorted
out, your spending pattern will change and you will start saving more than what
you are doing now…

If you get a Bonus at the end of the year (even private
co.’s have started giving out bonuses at the end of the year). If something
like that happens, don’t splurge all of it. Save at least a part of it (preferably
30% or more) and use the rest to enjoy the fruits of your hard work throughout
the past year..

Some Last Words:

Becoming Rich and Financially Prosperous usually requires a
lot of effort (Unless you are rich by birth or hit the lottery). A Smart person
always knows where his money is going, keeps his debt to the minimum and
invests prudently for many years to achieve his/her goal of financial
prosperity and independence. Hope you found these tips useful…

2 comments:

It differs from person to person and their individual financial situation. There is no single one size fits all answers to this Q. Usually, people would stop their investments and use the corps to fund their living for the interim period while they are looking for the new job

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